Question

Krepps Corporation produces a single product. Last year, Krepps manufactured 29,650 units and sold 24,600 units. Production costs for the year were as follows:

Direct materials	$222,375
Direct labor	$145,285
Variable manufacturing overhead	$243,130
Fixed manufacturing overhead	$563,350

Sales totaled $1,070,100 for the year, variable selling and administrative expenses totaled $140,220, and fixed selling and administrative expenses totaled $210,515. There was no beginning inventory. Assume that direct labor is a variable cost.

Under variable costing, the company's net operating income for the year would be

Answer 1

Variable costing:
Sales		1070100
Less: Variable expenses
Direct materials	184500		=222375/29650*24600
Direct labor	120540		=145285/29650*24600
Variable manufacturing overhead	201720		=243130/29650*24600
Variable selling and administrative expenses	140220
Total variable expenses		646980
Contribution margin		423120
Fixed expenses:
Fixed manufacturing overhead	563350
Fixed selling and administrative expenses	210515
Total fixed expenses		773865
Net operating income for the year		-350745
Absorption costing:
Sales		1070100
Less: Cost of goods sold
Direct materials	184500		=222375/29650*24600
Direct labor	120540		=145285/29650*24600
Variable manufacturing overhead	201720		=243130/29650*24600
Fixed manufacturing overhead	467400		=563350/29650*24600
Cost of goods sold		974160
Gross margin		95940
Less: Selling and administrative expenses		350735	=140220+210515
Net operating income for the year		-254795
The company's net operating income for the year would be	95950	lower than absorption costing	=350745-254795